Lehman’s Morbid Legacy

As the fifth anniversary of Lehman Brothers' collapse approaches, we need analyses of the previously unthinkable outcomes that have become reality – with profound implications for current and future generations – and that our systems of governance have yet to address properly. Four such outcomes come to mind.

NEWPORT BEACH – As the fifth anniversary of the disorderly collapse of the investment bank Lehman Brothers approaches, some analysts will revisit the causes of an historic global “sudden stop” that resulted in enormous economic and financial disruptions. Others will describe the consequences of an event that continues to produce considerable human suffering. And some will share personal experiences of a terrifying time for the global economy and for them personally (as policymakers, financial-market participants, and in their everyday lives).

As interesting as these contributions will be, I hope that we will also see another genre: analyses of the previously unthinkable outcomes that have become reality – with profound implications for current and future generations – and that our systems of governance have yet to address properly. With this in mind, let me offer four.

The first such outcome, and by far the most consequential, is the continuing difficulty that Western economies face in generating robust economic growth and sufficient job creation. Notwithstanding the initial sharp drop in GDP in the last quarter of 2008 and the first quarter of 2009, too many Western economies have yet to rebound properly, let alone sustain growth rates that would make up fully for lost jobs and income. More generally, only a few have decisively overcome the trifecta of maladies that the crisis exposed: inadequate and unbalanced aggregate demand, insufficient structural resilience and agility, and persistent debt overhangs.

Mohamed A. El-Erian, Chief Economic Adviser at Allianz, the corporate parent of PIMCO where he served as CEO and co-Chief Investment Officer, was Chairman of US President Barack Obama’s Global Development Council. He previously served as CEO of the Harvard Management Company and Deputy Director at the International Monetary Fund. He was named one of Foreign Policy’s Top 100 Global Thinkers in 2009, 2010, 2011, and 2012. He is the author, most recently, of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.

I wonder if two more problems can be brought to table for deliberation and debate. First, the present policy stance is oriented towards de-risking public institutions. For example, defined benefits for the employees (by the businesses) or the citizens (by the governments) are fast evaporating. Banks pass on various risks to the customers, who do not have any bargaining power against a banking system. Same is the story in insurance, power and other sectors. One of the outcomes of such a shift in focus is that life of individuals have become more risk prone. As Elizabeth Warren found out, a single adverse medical event was significantly responsible for causing bankruptcy in middle class America; families are becoming highly sensitive to slightest volatility in the their incomes and do not have any savings or safety nets to fall back upon. The distress caused by the policies to the individuals remains to be integrated in policy deliberations and debates.

Second, there have been social outcomes of the present model of growth through economic liberalism, which are damaging to the individuals and the society, and which in their present trajectory may soon become unsustainable. One such outcome is higher divorce rate and single parent homes - 90% of whom are single mothers. There is ample evidence in psychological research that for healthy development of the child, she needs cordially conjoined parents. The present economic policies demand harder work for longer hours from both the parents, which translates into lesser availability of time for the child, which though is known to be vital for healthy development of the child, is becoming less and less available for more and more children across the world. Under the present economic policy regime, the needs of the child has become a casualty. There are several other such social outcomes that needs to be recognized and discussed.
Sure, all these are unintended effects of the economic policy structure, but the evidence for such effects are overwhelming. We may disregard these and similar outcomes at our peril.

When I started my career, I do not recall discussing the name of the Governor of Reserve Bank, if at all the recall would be in remembering the name from the signature in a 100 Rupee note; the politicians were running the economy and the Finance Minister remotely came close to representing the Financial world including the regulatory domain. Then the balance of payment crisis struck and the liberalization happened, but even then the role of the Central bank was in the background. In recent times it has become quite different, the Central banker becomes the crucial guardian of the finances of the country.

What has changed in India happened many years back in the Western World and central banks were the critical engines of growth, who came with their policy instruments to unlock credit flows or to stymie them. These processes have now moved from the conventional to the unconventional, while the role of the government has come down so dramatically.

Perhaps the times would again change, as in this shared responsibility, there is no binding that monetary policy would be the do-all and end-all for the economic engine to gain traction for all times; may be the time has already arrived.

The truth is the Lehman Brothers Bank and all contributing to its collapse in 2008 should have received the Nobel Peace Prize.
When someone is sick with a serious disease one of the greatest news, and the basis of the healing is finding the right diagnosis.
When the bank collapsed, pulling the world economy with it we had the right diagnosis, that this way of life, this socio-economic system is unsustainable.
We had a fantastic chance to start some honest, and thorough self-examination and adjust, start building a new system for a better future.
Instead we launched a series of cosmetic, superficial "solutions", blowing bubbles on top of bubbles all over the place.
Thus we are sitting in no man's land now, dejectedly waiting for the next collapse that is going to be much harder and much more devastating as even the previously still growing "BRICS" have slowed and started to fall since, so there is nobody whose remaining momentum could carry the collapsing structure forward.
Sometimes the "bad guys" are really "good guys" as long as we use their acts properly.
Unfortunately we have mistaken our life with a Hollywood movie, here we have to write and act out the happy ending, provided we understand the movie we are in.

A major driver of private sector productivity, and thus private sector wages, is public sector logistics productivity: the ability to move goods and services around the economy, including information of broadband.

For the first time in US history, a challenging economic situation was not been responded to with robust investment in transportation infrastructure. The modern Democratic party cares nothing about middle-of-the road private sector workers. Nothing. These people are props used for public hallelujah town hall meetings to kvetch about "the middle class."

The entire experience of the complete Obama economic team is limited to having worked in big bank buildings in New York. Wealth is not something that comes from work, but is simply blips moving across a video screen to these people. Give me my bonus!

And why are we worrying about future generations. We're teaching the young ones the lessons of life with our internship programs. Wage and house laws? Down with excess regulation.

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PS OnPoint

The Mueller report in America, along with reports of interference in this week’s European Parliament election, has laid bare the lengths to which Russia will go to undermine Western democracies. But whether Westerners have fully awoken to the threat is an open question.

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